DEFINITION of ISEE Sentiment Indicator
The ISEE sentiment indicator (or sentiment index) measure of investor sentiment in the market, measured by looking at the number of opening long call options to opening long put options purchased on the International Stock Exchange (ISE), an electronic options exchange. The measure only considers the purchases made by retail customers and does not include the purchases made by market makers or institutional clients, as customers are thought to be the best measures of sentiment.
ISEE=(Long PutsLong Calls)×100where:ISEE=ISE Sentiment IndexLong Calls=Number of long call options purchasedLong Puts=Number of long put options purchased
If the value of the indicator is greater than 100, it means that more long call options have been purchased by investors than long put options. If the indicator is below 100, it means that more long puts have been purchased compared to long calls. The higher the index is above 100, the more bullish the market sentiment is thought to be, with measures below 100 signaling bearish sentiment.
BREAKING DOWN ISEE Sentiment Indicator
The ISE Sentiment Index (ISEE) brands itself as a unique measure of market sentiment using put/call value that only uses opening long customer transactions. Opening long transactions made by customers are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock - they buy calls when the expect the market to go up, and puts to protect themselves when markets go down. Market maker and firm (institutional) trades are excluded from the index's calculation since they are not thought to be representative of true market sentiment due to their specialized nature.
Because of this, the ISEE calculation method is tauted as a more accurate measure of true investor sentiment than traditional put-call ratios. The traditional put-call ratio is an indicator that provides information about the trading volume of all put options to call options on a given security. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets. Technical traders use the put-call ratio as an indicator of performance and as a barometer of the overall market sentiment.
The ISEE's shortcoming, despite its distinctive methodology, is that it only tracks transactions carried out by customers on its own platform - the ISE exchange. According to the options clearing corporation (OCC), the ISE contributes around 8% of all exchange traded options volume in the United States, and a large proportion of that is market maker or institutional orders. Still, the ISEE can be used in conjunction with the traditional put-call ratio to make more informed trading decisions.